Letters of intent/interim contracts
In practice, parties often commence work before the contract is finalised, often pursuant to a letter of intent. The Court of Appeal's decision in Arcadis Consulting-v-AMEC (BCS) acknowledges the commercial reality that when parties do so, they do so by agreement and so are governed by an "interim" contractual relationship. It is important to recognise that the terms and conditions governing such an "interim" contract are not the same terms that will govern the relationship once the final contract is drawn up and signed.
In Arcadis, an engineer had commenced works pursuant to a letter of instruction in advance of the execution of an agreement that the parties were in the final stages of negotiating but, ultimately, did not finalise. The letter of instruction referred to a document containing various terms and conditions, including a cap on the engineer's liability. A claim was subsequently brought against the engineer for alleged defective works and the engineer pointed to the liability cap for protection.
First instance decision
At first instance the High Court considered two issues: (1) whether there was a contract between the parties in circumstances where the agreement was never finalised; and (2) if so, whether the liability cap was part of that contract.
The High Court held that a contract was formed when the letter of instruction was accepted but the liability cap was not part of the contract because the document it was contained in was never expressly accepted by the engineer.
Court of Appeal
The Court of Appeal overturned the High Court's decision on the liability cap. The fact that the letter of instruction referred to the document containing the terms and conditions (including the liability cap) was sufficient to incorporate the liability cap into the "interim contract". Indeed, the Court of Appeal noted that the High Court's first instance finding was an "extraordinary" result, because it meant that the engineer had agreed to assume an unlimited liability for its contractual performance, which it would never do in practice.
It was irrelevant that the parties had continued to negotiate the terms of the agreement after the commencement of the works, and had even significantly amended the limitation of liability clause in subsequent drafts. Those negotiations and revisions were in respect of the potential agreement, which would not be effective until execution, and did not affect the terms of the "interim contract". The negotiations were not relevant to the terms of the "interim" contract, which had already been agreed.
Lessons learned
The Court reports are littered with cases about the terms upon which parties have contracted and the "battle of the forms" continues to keep lawyers occupied when projects go wrong.
It is easy to advise that work should not commence until the contract is signed and that should be best practice. However, practical considerations mean it is not always possible.
The Court of Appeal's decision acknowledges this commercial reality by confirming the existence of an "interim" contractual relationship in these circumstances.
Nevertheless, the terms and conditions governing such an "interim" contract may not be the same terms that are anticipated will govern the final relationship. Therefore, it is important that there is a clear understanding of the terms that do apply to that interim contract, particularly for those issues that have crucial commercial importance like a cap on liability. That is because those terms will govern the relationship between the parties until the final contract is negotiated and executed. If a final contract is never concluded (as was the case in Arcadis), then the terms governing any interim arrangement will govern any subsequent dispute.
Finally, once a final agreement is concluded, remember to include an "Entire Agreement" clause recording that the agreement in its final form supersedes any and all prior agreements and terms, and applies retrospectively to any works already performed. This provides certainty to the parties that the interim contract no longer applies.
Authors: Tom Duncan and Lucy McKenzie
Case referred to:
Arcadis Consulting (UK) Ltd (formerly Hyder Consulting (UK) Ltd) v AMEC (BCS) Ltd (formerly CV Buchan Ltd) [2018] ECWA Civ 2222
